Energy capture, technological change, and economic growth: an evolutionary perspective Article (Accepted Version) Court, Victor (2018) Energy capture, technological change, and economic growth: an evolutionary perspective. BioPhysical Economics and Resource Quality, 3 (12). pp. 1-27. ISSN 2366-0112 This version is available from Sussex Research Online: http://sro.sussex.ac.uk/id/eprint/78679/ This document is made available in accordance with publisher policies and may differ from the published version or from the version of record. If you wish to cite this item you are advised to consult the publisher’s version. Please see the URL above for details on accessing the published version. Copyright and reuse: Sussex Research Online is a digital repository of the research output of the University. Copyright and all moral rights to the version of the paper presented here belong to the individual author(s) and/or other copyright owners. To the extent reasonable and practicable, the material made available in SRO has been checked for eligibility before being made available. Copies of full text items generally can be reproduced, displayed or performed and given to third parties in any format or medium for personal research or study, educational, or not-for-profit purposes without prior permission or charge, provided that the authors, title and full bibliographic details are credited, a hyperlink and/or URL is given for the original metadata page and the content is not changed in any way. http://sro.sussex.ac.uk Energy capture, technological change, and economic growth: an evolutionary perspective Victor Court∗ Abstract After several decades of discussions, mainstream economics still does not recognize the crucial role that energy plays in the economic process. Hence, the purpose of this article is to reformulate a clear and in- depth state of knowledge provided by a thermo-evolutionary perspective of the economic system. First, definitions of essential concepts such as energy, exergy, entropy, self-organization, and dissipative structures are recalled, along with a statement of the laws of thermodynamics. The comprehension of such basics of thermodynamics allows an exploration of the meaning of thermodynamic extremal principles for the evolu- tion of physical and biological systems. A theoretical thermo-evolutionary approach is then used to depict technological change and economic growth in relation to the capture of energy and its dissipation. This the- oretical analysis is then placed in a historical context. It is shown that during the entirety of human history, energy has been central to direct the successive phases of technological change and economic development. In particular, energy is crucial to understanding the transition from foraging to farming societies on the one hand, and from farming to industrial societies on the other. Finally, the theoretical and historical insights previously described are used to discuss a possible origin of the economic slowdown of the most advanced economies for the last 40 years. The article concludes that conventional economic growth theories should finally acknowledge the central role that energy plays in the economic process. Key Words: Energy capture; technological change; economic growth; evolution. JEL Classification: B52, O44, Q43, Q57. Published article, please cite as: Court, V. (2018). Energy capture, technological change, and eco- nomic growth: an evolutionary perspective. BioPhysical Economics and Resource Quality, 3(3): 12 ∗CERES, École Normale Supérieure – PSL Research University, 24 rue Lhomond, 75005 Paris, France; and Chair Energy & Prosperity, Institut Louis Bachelier, 28 place de la Bourse, 75002 Paris, France. Email: [email protected]. 2 ACCEPTED MANUSCRIPT –BIOPHYSICAL ECONOMICS AND RESOURCE QUALITY, 3(3): 12, 2018 1 Introduction 1.1 Neo-Keynesian, ecological, and evolutionary views on production factors and growth mechanisms Mainstream economists (i.e., proponents of the neoclassical-Keynesian synthesis), usually think of labor and capital (with land as a subcategory) as the primary factors of production, and goods such as fuels and ma- terials as intermediate inputs. On the contrary, ecological/biophysical economists see labor and capital as intermediate inputs that are created and maintained by the use of the primary input of energy to transform materials. These different views on production factors translate into contrasting economic growth perspec- tives. Mainstream growth models focus on the accumulation of physical and human capital, their combination with routine labor and technology, and on the role of institutions to enable productivity increases (Acemoglu, 2009; Aghion and Howitt, 2009; Barro and Sala-i Martin, 2004; Jones and Vollrath, 2013). Mainstream growth models usually ignore energy, but sometimes acknowledge that a limited supply of energy (or a more general environmental asset) can generate a temporary constraint on growth that is ultimately relaxed the adaptation of market prices, or by technological progress. By contrast, the ecological economics literature posits a central role for energy use in driving growth and argues that limits to substitutability and energy- related technological change determine long-term growth prospects (Ayres and Warr, 2009; Daly, 1985; Georgescu-Roegen, 1971; Kümmel, 2011). In evolutionary economics, the relative importance of capital, labor, technology, and natural resource in- puts (energy and materials) tends to follow the mainstream approach. Therefore, evolutionary economics does not make energy central to its conceptual framework, despite several applications of evolutionary think- ing to resource use and ecosystem management issues (van den Bergh, 2007). Furthermore, from the pi- oneering work of Nelson and Winter(1982), modern evolutionary economics has tended to be concerned with supply-side questions, posed at the firm or industry level.1 This supply-side focus has been difficult to connect, both analytically and empirically, with macroeconomics. Indeed, many neo-Schumpeterian evo- lutionary economists refrain from drawing macroeconomic conclusions from their analyses because of the tendency for aggregation to wash out the interesting evolutionary dynamics (Foster, 2011). Nevertheless, there has been some notable recent attempts to tackle this problem (Boehm, 2008; Carlaw and Lipsey, 2011; Dosi et al., 2006; Saviotti and Pyka, 2008). These contributions provide useful insights but they are based on very different analytical frameworks and, as argued by Foster(2011), the absence of a common method- ology has tended to place evolutionary macroeconomics at a competitive disadvantage in comparison to the relatively unified theoretical approach adopted by mainstream growth theorists. 1.2 Goal and organization of the paper Similarly, the methodological pluralism of ecological economics created an opportunity for mainstream eco- nomics to gradually downplay the vigorous criticisms of the ecological field (Anderson and M’Gonigle, 2012). Plumecocq(2014) shows that since its inception in 1989, the discourse of articles published in Ecological Economics has converged towards mainstream environmental economics. As a corollary, it must be acknowl- edged that ecological economics has failed to make mainstream economics more aware of the crucial role that energy plays in the economic growth process. This is clear when one sees that the term ‘energy’ is not featured a single time in several textbooks presenting mainstream economic growth theories, namely Aghion and Howitt(1998), de La Croix and Michel(2002), Barro and Sala-i Martin(2004). 2 Similarly, energy is absent from the recent studies that seek to develop a unified growth theory (UGT), which could provide a unique analytical framework to study economic development over the entire course of human history (for a 1The birth of a coherent body of evolutionary economic thoughts is generally attributed to Nelson and Winter(1982). Nevertheless, Hodgson(1993) notes that economic evolutionary concepts can be found in the work of Marx, Veblen, Marshall, and Schumpeter; whereas van den Bergh(2007) highlights that similar evolutionary concepts are present in the work of the founding fathers of ecological economics such as Boulding and Georgescu-Roegen. 2In Acemoglu(2009) and Aghion and Howitt(2009) energy is mentioned in relation to just one econometric study that investigates innovation in energy sectors. The less mathematically formalized and more historically oriented book by Weil(2013) does a slightly better job than other economic growth textbooks, it does mention energy several times, essentially in the context of the Industrial Revolution. The third edition of Jones and Vollrath(2013)’s textbook dedicates a whole chapter to exhaustible resources that was not present in previous editions. ENERGY CAPTURE, TECHNOLOGICAL CHANGE, AND ECONOMIC GROWTH 3 comprehensive review of UGT, see Galor, 2011). So far, unified growth models have focused on human capi- tal, technological change, and the role of their feedback relationship in fostering sustained economic growth from an initial limited growth regime. As a consequence, these models are supposed to explain the Industrial Revolution without appealing to the role of energy, in particular the associated energy transition towards fossil fuels.3 This is obviously confusing, to say the least, as it goes contrary to the work of many economic historians such as Pomeranz(2000), Fouquet(2008), Allen(2009), Kander et al.(2013), Malm(2016), and